A study of bear markets shows that in 70 percent of the cases stock markets fell back to a new low. In 30 percent there was a continuing recovery after a severe crash. We are probably experiencing the latter scenario now, according to BNP Paribas Fortis’ chief strategist Philippe Gijsels.
Gijsels says that the bank has been busy buying attractively priced shares and high yield bonds for clients for some time now.
The reason for this optimism is the resolute actions of central banks. ‘Initially markets panicked as the idea was that central banks would do nothing, because they had run out of ammunition. And it was also believed governments would probably talk for a very long time and eventually do very little.’
But tables turned when governments and central banks came with an unexpectedly powerful monetary and fiscal response, inspiring investor confidence to return. ‘Central banks appear to be willing to help into infinity by buying other things than government paper, such as even junk bonds.’
According to the chief strategist, governments are willing to go much further than they did in 2008. ‘They want to prevent a new Lehman, so that confidence returns. Look, you still have to go through the desert, that’s no different. But you need water. In the case of the markets, that’s liquidity, and that’s what central banks are taking care of now,’ he says.
Stagflation & deflation
Gijsels thinks it’s important to study history. ‘It can give us some clues as to where to go. Are we going to deflation or stagflation, i.e. a combination of high inflation and stagnant growth? Depending on the environment, the investment style is very different,’ he notes.
Gold is highly recommended in the current environment, according to Gijsels, especially since money creation is now such a significant part of the monetary response. He thinks the all-time high of over 1,900 dollars per ounce is within reach. BNP Paribas Fortis itself has had an exposure to gold for some time now. Gijsels says the bank bought a position in the precious metal when the price was just over 1,000 dollars.